The purpose and transparency of the repurchase agreement in the South African financial system

Abstract:

Under the previous accommodation system the monetary policy of the South African Reserve Bank failed to operate by means of open market transactions, and interest rate movements was solely the discretion of the South African Reserve Bank and was driven by means of the traditional Bank rate. The need for a more efficient and transparent accommodation system that is based on open market transactions and determined by demand and supply of liquidity was evident, and therefore the introduction of the repurchase agreement system in March 1998 was unavoidable. The ultimate objective of monetary policy is to achieve price stability, i.e. to ensure that the Reserve Bank has a goal of maintaining inflation at a level that would be more or less in line with the average rate of inflation in the economies of South Africa's major trading partners and international competitors. It is important that the Reserve Bank enhances transparency for the effective operation of an inflation-targeting framework. Transparency introduces predictability and helps to ensure that market expectations are consistent with the objective of price stability. The level of interest rates in a country can influence price stability directly. A transparent monetary policy will mean that changes in short-term interest rates should not surprise the market. Markets should anticipate decisions taken by the Reserve Bank and therefore transparency should promote the predictability of monetary policy. Since its implementation, the current accommodation system (repurchase agreement) has raised some concerns regarding transparency. The government's new monetary policy framework of inflation targeting also has some limitations that can influence the achieving of such targets.
The one influences the other, and if interest rates and inflation is not managed transparently, it will have a severe impact on the overall efficiency of monetary policy in South Africa.